SMD invested a billion in Kao

SMD invested a billion in Kao

MASERU – STORM Mountain Diamonds (SMD) says it has been a monumental struggle to keep Kao Mine operational because of debts, mounting operational costs and low grade ore.
The revelations are contained in a statement the company prepared ahead of its meeting with the Public Accounts Committee (PAC). The PAC has accused the company of failing to pay dividends to the government which owns 25 percent of the mine.

But SMD says such allegations are not based on facts and seem to ignore the huge investment it has made to bring the mine back to full production.
It says it is tough to pay dividend because of huge investment from marginal mine saddled by debt and under pressure from a subdued diamond market.

The company says it is only through good management and huge investment that the mine has remained operational. It has survived the slumps in diamond prices that pushed many mines out of business.

“If SMD had been funded by an institutional investor they would almost certainly have foreclosed on the loans during this period,” the statement reads.
“SMD’s investor has time and time again extended the date of loan repayments on the loans so that SMD repays as and when it has the finances to do so,” it says.
“This flexibility has enabled SMD to survive through difficult periods.”

It says the mine remains marginal and the high grade ore areas of the pipe have all but been depleted.
The fluctuations in the diamond prices are considerable and when the markets are down then SMD can quickly become loss-making, despite good production, the company says.

It says January 2019 was a loss-making month because the diamond price achieved at the recent sale averaged USD252 (about M3276) per carat against a target of USD390 (about M5070) per carat.
The company says production costs are going to rise in the next years due to increased waste mining necessitated by the mine plan.
“SMD will continue to require stay-in-business capital. While parts of this capital can be funded from reserves, large capital outlays will require investor funding,” the statement reads.

“In around seven years, SMD will require significant capital to relocate its plant.”
It says the development of Kao and other mines in Lesotho is not possible without Foreign Direct Investment.
The company says for years, it was held that although the kimberlite body was dimondiferous, “the grade of the deposit and the value of the diamonds were too low to make the development of the mine economically viable”.

It explains that when the area was explored in the 1950s sampling of the kimberlite ore body showed that it was a largely low grade ore body, with the bulk of the deposit having a grade of approximately 6 carats per hundred tonnes (“cpht”).
It was also found that a small corner of the deposit, known as the K6 facie, was of a medium grade, at around 19 cpht.
“Since the 1950s various commercial mining enterprises dabbled with the prospects of developing this mine,” the statement reads.

One of the companies that tried their luck was Kao Diamond Mine, a subsidiary of Global Resources Inc., which acquired mining lease in 2006.
It started production largely in the higher grade K6 mining area but production was not satisfactory.

In February 2009 the then Minister of Natural Resources, Minister Monyane Moleleki, wrote Kao Diamond Mine informing it that it was in breach of its mining agreement.
The letter stated that since they had acquired the mining lease, it had exported diamonds on four occasions, exporting only 7000 carats.
Incidentally, this is less than half a month’s current production at Kao.

Moleleki’s letter had further stated that Kao Diamond Mine had failed to pay any royalties at all to the government since acquiring the mining lease.
But these were not its only woes.
It was in debt to the tune of approximately M40 million.
Creditors filed for liquidation in 2009 and a provisional order was granted.
Kao Diamond Mine never got through these difficulties and was eventually finally liquidated.
Explaining the operational difficulties at Kao, SMD says one of the early explorers, Keith Whitelock, described the Kao deposit as a “high tonnage, low value deposit at a remote site located in a deep valley system draining into the environmentally sensitive Katse dam in a relatively populous agricultural area”.

“It is clear that Kao contains all the elements of a difficult and challenging operation.”
SMD however says it is proud to say it has operated the Kao kimberlite relatively successfully despite all the odds against it.
SMD has to date paid government M330.7 million in royalties, M10.3 million for the mining lease and collected M151.6 million in withholding tax for the government.
The government has also received M117.4 million taxes deducted from salaries.
All in all the company has paid a total M610.2 million to the government.
“This success has not come by accident,” it says in the statement.
SMD says it is only through prudent management of expenditure and increasing the economies of scale that the mine has managed to become a viable business.

These, the company says, could not have been achieved without substantial capital investment into the business.
The company says to date it has invested over M1.1 billion to bring the mine to the current level.
“The investment into the mine’s development has thus far resulted in direct benefit in royalty and taxes to the GOL in the amount of M610.2 million.”

The mine employs more than 600 people.
“SMD is a responsible corporate citizen which is compliant with its mining lease agreement and the laws of Lesotho,” it says.
“Despite a challenging outlook, SMD, with a predicted life of mine of over 20 years, looks forward to working with all its stakeholders in order to operate sustain

Staff Reporter

Previous PAC demands dividends from Kao
Next Nthane fights ministry

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